AccountingQA Latest Questions

Jayesh Gupta
Jayesh GuptaCurious
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  2. Karishma

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Credit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.

    The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.

     

    Debit balance in Pass Book

    When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

     

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

     

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

     

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.

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Jayesh Gupta
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  2. Saurav
    This answer was edited.

    Credit balance means excess of credit side over debit side. For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a creditRead more

    Credit balance means excess of credit side over debit side.

    For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a credit balance of 6,000 of trade payable at the end

    .A Credit balance signifies all income and gains and all liabilities and capital that is there in business.

     

    Liabilities and Capital

    • Account Payables– Account Payables means the amount that is due to the customer by the entity. Its credit balance will always increase when there is an increase in account payables and will decrease when there is a decrease in account payables. For eg-: The stock that has been purchased in credit from creditors of 10,000 will result in an increase in credit balance.
    • Bank Overdraft-Bank Overdraft means when the amount withdrawn from the bank is more than the balance left in the bank. For example, there is a bank balance of 2,000 in the bank but an amount of 4,000 has been withdrawn from the bank. So in such a case, there will be a credit balance of 2,000 which is in Bank Overdraft
    • Bonds– Bonds are the amount that is withdrawn from people for a specific time period which gets redeemed at a coupon rate after such a specific period. For example- A 10% bond of 10,000 is given to a group of people which will be redeemed after 5 years.
    • Income Tax Payables-Income Tax Payable means the amount the company left to pay to the government in earlier periods. For example- There is a tax liability of 10,000 in FY20-21 from which 8,000 was paid in the current year and 2,000 paid in FY21-22.
    • Notes Payable– Notes Payable is a type of promissory note in which a person pays some amount to an entity that the entity will write in a specific period. For example Notes payable of 1,000 given by a person to an entity which will be returned in 3 months with interest
    • Capital– Capital means the amount that is introduced by the company at the beginning of the business for the operations and survival of the business. For example- A capital of 10,000 has been introduced by the company.

     

    Income and Gains

    • Interest Received-Interest Received means the amount which is invested by the company in some other entity and interest received on it
    • Dividend Received– Dividend means the amount received from the entity in which amount invested by the company
    • Rent Received– Rent is the amount that the company receives by letting out their land to another person or entity for use
    • Gains on Sale of Furniture– Gain on Sale of Furniture means that the amount received from the sale of furniture is more than the amount of furniture. So the difference between the amount received from the sale and the cost of furniture is called a gain on the sale of furniture.

    So after seeing all the above points we can conclude that the credit balance includes all the income in the P&L account and all the liabilities in the Balance sheet. So its balance increases when there is an increase in its account.

     

    Debit Balance

    Debit balance means excess of credit side over debit side.

    For Example- At begining of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end

    A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.

     

    Asset

    • Cash and Bank Balance
    • Account Receivables
    • Property, Plant, and Equipment
    • Inventory
    • Investments
    • Bill Receivables
    • Intangible Assets

     

    Expenses and Loses

    • Rent
    • Depreciation
    • General Expenses
    • Loss on Sale of asset
    • Printing and stationery
    • Audit fees
    • Outstanding fees
    • Salaries and Wages
    • Insurance
    • Advertising
    • Promotional expenses
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Jayesh Gupta
Jayesh GuptaCurious
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  2. Kajal
    This answer was edited.

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains” So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).   TRADRead more

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains”

    So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).

     

    TRADING ACCOUNT

    Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.

    Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.

     

    CREDIT SIDE OF TRADING ACCOUNT

    It includes,

    SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.

    Suppose you are in the business of manufacturing and trading shirts. You sold shirts worth $ 20,000 during the year. This $20,000 is your sales.

    SALES RETURN – When the goods sold by you are returned by the customer, it is known as sales return. Sales return is deducted from the sales.

    Continuing with the above example, the customers returned shirts of $1,000 because they didn’t like them. This return is known as sales return or return inward (as goods are coming back i.e. in)

    CLOSING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.

    The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called Closing stock.

    Closing stock is valued at cost price or market price whichever is less.

    It includes,

    1. Closing stock of raw materials
    2. Closing stock of semi-finished goods
    3. Closing stock of finished goods

    For example – On 31st March 2023, there was unused raw material worth $1,000 and shirts worth $5,000 remained unsold.

    So, we have Closing Stock of Raw material – $1,000

    Closing Stock of Finished Goods – $5,000

    Normally, the closing stock is given outside the Trial Balance because its valuation is made after accounts have been closed. It is incorporated in the books by transferring it to the Trading A/c. So, it is shown on the credit side of Trading A/c as well as on the assets side of the Balance sheet.

    However, if the closing stock is given inside the Trail Balance, it means that the closing stock must have already been deducted from the Purchases account. So, closing stock will only be shown on the assets side of the Balance sheet.

    GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > credit side.

     

    DEBIT SIDE OF TRADING ACCOUNT

    It includes

    OPENING STOCK – The value of the stock at the beginning of an accounting year is called Opening stock.

    The closing stock of the last year becomes the opening stock of the current year.

    PURCHASES – Goods that have been bought for resale or raw materials purchased for the manufacturing of the product are terms as Purchases. These goods must be related to the business you are doing. It includes cash as well as credit Purchases.

    PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.

    WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.

    CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.

    MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.

    DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.

    IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities.

    If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.

    ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.

    Royalty is charged to the Trading A/c as it increases the cost of production.

    GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    The journal entry for the dividend collected by the bank is as follows: Bank A/c                                                                Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more

    The journal entry for the dividend collected by the bank is as follows:

    Bank A/c                                                                Dr. Amt
    To Dividend Received A/c Amt

    Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.

    The logic behind the journal entry

    This can be explained through the following rules of accounting:

    • Golden rules of accounting
    • Modern rules of accounting

    Golden rules of accounting

    A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”

    Hence, the bank account is debited as the money is coming into the bank.

    Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”

    Hence, the dividend received account is credited as income.

    Modern rules of accounting

    As per modern rules of accounting, a bank account is an asset account.

    The asset account is debited when increased and credited when decreased.

    Hence, the Bank account is debited here as it is increased.

    A dividend received account is an income account.

    The income account is credited when increase and debited when decreased.

    Hence, the dividend received account is credited here as it is increased.

    Treatment in the financial statements

    Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.

    The bank account is an asset so it will be shown on the balance sheet.

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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    20 Journal Entries Journal is the book of initial entry, hence the transactions are at first recorded in the journal by the way of journal entries. Journal entries are made as per the double entry system of accounting, where for each transaction one account is debited and another account is creditedRead more

    20 Journal Entries

    Journal is the book of initial entry, hence the transactions are at first recorded in the journal by the way of journal entries.

    Journal entries are made as per the double entry system of accounting, where for each transaction one account is debited and another account is credited.

    In the case of compound journal entries, one set of accounts is debited and one set of accounts is credited.

    The amount of debit and credit always remains the same.

    For example, when cash is introduced into a business, it affects two accounts: Cash A/c and Capital A/c. The accounts are debited and. credited as per the golden rules of accounting.

    The journal entries which I have provided are based on the following transactions and events:

    1. The business started with Rs. 1,00,000 
    2. Bought machinery for Rs. 15,000 and furniture for Rs. 10,000
    3. Purchased goods of Rs. 20,000 with cash 
    4. Bought Stationery for Rs. 500 
    5. Cash deposited into bank Rs. 40,000 
    6. Goods sold to Matt for Rs. 15,000 
    7. Purchased goods from Uday of Rs. 30,000 
    8. Being Rs. 5,000 rent paid for premises 
    9. Cheque received from Matt of Rs. 15,000 
    10. Defective goods returned to Uday returned of Rs. 2,000 
    11. Cash sales of Rs. 25,000 
    12. Carriage Inward paid Rs. 700
    13. Cash withdrawn from bank Rs. 15,000 
    14. Full payment made to Uday in cash. Discount received from Uday Rs. 1000.
    15. Refreshments given to customers of Rs. 200
    16. Goods sold to Shyam for Rs. 7,500 
    17. Goods purchased from Ram of Rs. 50,000 
    18. Salaries paid to employees by bank Rs. 5,000 
    19. Good sold to Suri for Rs. 25,000 
    20. Insurance premium paid of Rs. 1,500 by the bank.

    Journal Entries

    The journal entries based on the above are as follows:

     

    Ledgers

    Ledger is known as the book of final entry. It is the book where the transactions related to a specific account are posted. This posting of transactions is done from journal entries.

    The posting of journal entries into the ledger is performed in the following way:

    The journal entry of cash sales is :

    Cash A/c                                                           Dr.            Amt
          To Sales A/c            Amt

    Here, Cash A/c is debited to Sales A/c. So, in the Cash A/c ledger, posting will be made on the debit side as “To Sales A/c”

    In the Sales A/c ledger, the posting will be made on the credit as “By Cash A/c” because Sales A/c is credited to Cash A/c

    For creating ledgers, journal entries are a prerequisite.

    Now, the ledgers to be created as per the journal entries made above are as follows:

    1. Cash A/c
    2. Bank A/c
    3. Capital A/c
    4. Furniture A/c
    5. Machinery A/c
    6. Purchase a/c
    7. Sales A/c
    8. Matt A/c (Debtor)
    9. Uday A/c (Creditor)
    10. Rent A/c
    11. Purchase Return A/c
    12. Stationery A/c
    13. Carriage Inward A/c
    14. Refreshment A/c
    15. Shyam A/c (Debtor)
    16. Ram A/c (Creditor)
    17. Suri A/c (Debtor)
    18. Refreshment A/c
    19. Discount Received A/c

    The account ledgers are as follows:

    Trial Balance

    A trial balance is a statement that is prepared to check the arithmetical accuracy of books of accounts.

    In this statement, the total of all accounts having debit balance and the total of all accounts having credit balance is computed. If the total of debit and credit matches, then it can be said that the books of accounts are arithmetically accurate.

    Here also we have prepared the trial balance by computing the total of accounts  having debit balances and the total of  accounts having credit balances

    The debit column total and credit column total are matching. Hence, we can say that the books of accounts we have prepared are arithmetically accurate.

    Note: Matt A/c and Uday A/c have not appeared in the trial balance because they do not have any carrying balance.

     

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Jayesh Gupta
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  2. GautamSaxena Curious .
    This answer was edited.

    Errors revealed by Trial Balance Trial balance, as we know, is a statement prepared after the ledger, followed by a journal. It has a list of all the general ledger accounts contained in the ledger of a business. Each nominal ledger account either holds a debit balance or credit. It is primarily useRead more

    Errors revealed by Trial Balance

    Trial balance, as we know, is a statement prepared after the ledger, followed by a journal. It has a list of all the general ledger accounts contained in the ledger of a business. Each nominal ledger account either holds a debit balance or credit.

    It is primarily used to identify the balance of debits and credits entries from the transactions recorded in the general ledger in a certain accounting period. The debit and credit sides total are equal in a trial balance.

    Classification of errors in the trial balance

    • Errors of Commission: Errors arising due to wrong posting of a journal entry, a ledger account, wrong totaling of a subsidiary book, or even wrong recording of accounts. Therefore, resulting in trial balance error. E.g business receives an amount on goods sold on credit but it is instead posted to additional capital a/c.
    • Errors of Omission: This occurs when some transactions are fully or partially omitted from books of accounts. A complete omission is a case when the transaction is completely omitted but a partial omission is seen when the transaction is entered in the journal but not posted to the ledger. E.g a cheque worth $4,100 was received from ABC Ltd. but completely omitted. Then the rectification entry shall be passed later on.
    • Compensating Errors: It occurs when the errors are equal in amount and opposite to each other so and so that they cancel each other which further creates no difference in the Trial Balance. E.g Harry’s account is debited to $300 wrongly instead of $400. On the other hand, Liam’s account is credited by $700 instead of $800.
    • Errors of Principles: These are the errors occurring when the entries that are posted are incorrect, violating the accounting policy. E.g when receiving money from debtor then debiting debtor and crediting the amount of money received.

    Some of the common errors

    Some more (commonly seen) errors while preparation of the trial balance:

    Errors of Commission

    1. Addition or totaling mistakes in the trial balance, debit, and credit side.
    2. Wrong totaling of subsidiary books.
    3. Error in the sum total of subsidiary book.
    4. Posting in the wrong account.
    5. Recording a transaction incorrectly in a journal.
    6. Balance wrote on the wrong side of the trial balance.
    7. Error in posting a journal to a ledger.
    8. Posting on the wrong side of the account.

    Errors of Omission

    1. Goods purchased and returned to the supplier may be entered in the purchase returns book but not posted in the debit of the supplier account.
    2. Cash paid to creditors was completely omitted from the recording.

    Compensating Errors

    • Wrong posting of the same amount in another account, which may not be affecting the equalizing of trial balance.

    Errors of Principles

    1. Posting twice to a ledger account.
    2. Balance c/d or balance b/d is written on the wrong side of the ledger account.
    3. Reversal of a journal entry by mistake like, crediting cash and debiting debtor’s a/c.

     

     

     

     

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Jayesh Gupta
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents. A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds. Both the statements are financialRead more

    A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents.

    A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds.

    Both the statements are financial statements and are used to analyze the financial performance of the company of two different reporting periods. Both the statements record the inflow and outflow of cash or funds, as the case may be.

    The primary objective of preparing a Cash Flow Statement is to gain an understanding of the changes in the net working capital of the company and to classify the activities in the company under three different heads which helps in better analysis of Financial Statements for management, outsiders, and investors.

    The primary objective of preparing a Fund Flow Statement is to track the movements of funds in the company, as the extent of use of long-term and short-term borrowings, frequency of their procurement, its application, etc.

    The components of the Cash Flow Statement are:

    • Cash Flow from Operating Activities- activities concerning the regular business operations and working capital are classified under this head.
    • Cash Flow from Investing Activities- investment in long-term assets or sale of such assets are considered under this head.
    • Cash Flow from Financing Activities- borrowings that a company makes to fund its operations, their interest payment, and repayment are covered under this head.

    The components of the Fund Flow Statement are:

    Sources of Funds:

    • Owners
    • Outsiders

    Application of Funds:

    • Funds deployed in Fixed Assets
    • Funds deployed in Current Assets

    A sample format of the Cash Flow Statement will be:

    Particulars Amount
    Cash Flow from Operating Activities XXX
    Cash Flow from Investing Activities XXX
    Cash Flow from Financing Activities XXX
    Net Increase (Decrease) in Cash and Cash Equivalents XXX
    Cash and Cash Equivalents at the beginning XXX
    Cash and Cash Equivalents at the end XXX

    A sample format of the Fund Flow Statement will be:

    Particulars Amount
    Sources of Funds XXX
    Funds from Operations XXX
    Sale of Fixed Assets XXX
    Issue of Shares XXX
    Issue of Debentures XXX
    Long Term Borrowings XXX
    Total (A) XXX
    Application of Funds XXX
    Loss from Operations XXX
    Payment of Tax XXX
    Repayment of Loan XXX
    Redemption of Debentures XXX
    Redemption of Preference Shares XXX
    Total (B) XXX
    Net Increase (Decrease) in Working Capital XXX

    To conclude the difference between Fund Flow and Cash Flow Statement will be:

    Cash Flow Statement Fund Flow Statement
    Record of inflow and outflow of cash. Record of sources and application of funds.
    Prepared to analyze cash used in various activities. Prepared to track the movement of funds and their applications.
    Components include:

    • Operating Activities
    • Investing Activities
    • Financing Activities
    		 Components include:

    ·       Sources of Funds

    ·       Application of Funds

     

     

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Jayesh Gupta
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement proviRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement provides information about the flow of cash over a period of time.

    OBJECTIVE

    Information obtained through cash flow statements is aimed to assess the ability of a business to generate cash and at the same time, maintain liquidity. Therefore, important economic decisions can be made by evaluating these cash flow statements.

    Cash Flow statements are categorized into

    • Operating Activities: These activities refer to the main activities of the business during an accounting period. They involve revenue-generating activities. As per the indirect method, profit before tax is taken as the starting point and all non-cash expenses are added while non-cash incomes are deducted. Whereas in direct method, cash receipts and cash expenses are added and subtracted respectively. Eg: sale of goods.
    • Investing Activities: These activities involve the sale and purchase of non-current assets and investments. Eg: cash payment for machinery.
    • Financing Activities: These activities result in a change in capital or borrowings. Eg: cash proceeds from the issue of equity shares.

    Importance of Cash Flow

    A cash flow statement gives us knowledge about the liquidity and solvency of the company. These are necessary for the survival and expansion of the company. It also helps in predicting future cash flows by using information from previous cash flows. It also helps in comparison between companies which shows the actual cash profits.

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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company. By entity, it means a shareholder may be: An individual Any other company Any other incorporatRead more

    Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company.

    By entity, it means a shareholder may be:

    • An individual
    • Any other company
    • Any other incorporated entity
    • Cooperative society
    • BOI( Body of Individuals)
    • AOP(Association of Persons)
    • Artificial Juridical Person

    The rights of shareholders depend on the type of shareholder one is.

    Types of shareholders

    1.   Equity Shareholders: By the term ‘shareholders’ we usually mean equity shareholders. They are permanent in nature i.e. they are not repaid the money they have invested into the company until the company is liquidated or wound up. Equity shareholders have the following rights:

    • Right to have a share in profits made by the company. The profit made by a company, when distributed to its equity shareholders is known as a dividend.
    • Right to vote on all resolutions to be passed in the Annual General Meeting of a company.
    • Right to get repaid in event of winding up of the company. However, they are paid after meeting the obligations of outsiders and of preference shareholders.
    • Right to transfer ownership of the shares. A shareholder may sell its shares to some willing buyer and cease to be a shareholder of a company.

     

    2. Preference Shareholders: They are shareholders who are given preference regarding:

    • Dividend
    • Repayment at time of winding up

    Unlike equity shareholders, they are not of permanent nature. Preference shares are redeemable i.e. they are to be repaid after a period which cannot be more than 20 years from the date of allotment of such shares (as the Companies Act, 2013). Also, a company cannot issue irredeemable preference shares. The rights of preference shareholders are as follows:-

    • By preference as to dividend, it means preference shareholders have the right to receive a fixed dividend as a certain percentage on the nominal value of the share and that too before equity shareholders are paid.
    • Right to get repaid at the date of redemption.
    • If the company get liquidated before redemption of the preference shareholder, then they have the right to get repaid before equity shareholders.

     

    3.  Differential Voting Rights Shareholders: These shareholders hold equity shares but with differential, right as to voting i.e. they may either have less voting rights or more voting right as compared to ordinary equity shares. Generally, DVR shares carry less voting power.

    For example, a DVR shareholder gets 1 vote for 10 shares whereas an ordinary equity shareholder gets 10 votes for 10 shares i.e. one vote for every share. DVR shares issued to raise not only permanent capital but also prevent dilution of voting rights.

    The rest of the right remains the same as the equity shareholders.

     

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partnerRead more

    When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partners can choose to forego their shares equally or in an agreed proportion.

    Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio formula can be calculated as:
    Sacrificing Ratio = Old Ratio – New Ratio

    To further understand the formula, let’s say Bruce and Barry are sharing a pizza of 6 slices equally (3 slices each). They decide to share their pizza with Arthur such that they all get equal slices (2 slices each). Hence, we can use the formula to calculate their sacrifice as follows:
    Bruce’s sacrifice = 3 – 2 = 1 slice
    Barry’s sacrifice = 3 – 2 = 1 slice

    Therefore, their sacrificing ratio = 1:1. In this same way, we can solve various problems to calculate the sacrifice of partners during a change in their profit sharing ratio.

    For example, Joshua and Edwin are partners, sharing profits in the ratio 7:3. They admit Adam into their partnership such that the new profit-sharing ratio is 5:2:3. Therefore, their sacrificing ratio can be calculated as:
    Joshua’s sacrifice = old share – new share = 7/10 – 5/10 = 2/10
    Edwin’s sacrifice = old share – new share = 3/10 – 2/10 = 1/10

    Hence, sacrificing ratio of Joshua and Edwin is 2:1. Once the denominators are equal, we ignore them and only consider numerators while showing sacrificing ratio.

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